Savings and Credit for U.S. Micro-enterprises: Individual Development Accounts and Loans for Microenterprise
This paper provides a framework for the integration of two asset-building instruments, Individual Development Accounts (IDAs) and loans for microenterprise. It reviews current practices in integrating IDA and microenterprise development strategies which include:
- Increasing deployment of loan capital for addressing barriers to low demand and deployment, including debt aversion, credit history, and equity gaps;
- Promoting healthy capital structures and mitigating lender risk. This helps a microentrepreneur to develop a healthy capital structure that balances debt with equity, reduces the lender's exposure to risk, and enhances a growing business' chances of survival.
The authors make some initial observations of the integration practices:
- Depending on an organization's target market, microentrepreneurs may prefer to save for their businesses rather than accumulate additional debt;
- Based on the risk tolerance of the organization, a microloan may be provided up front or only after the successful completion of the IDA program;
- Microborrowers may also benefit from entering IDA programs, which can improve both human and financial capacity.
The paper suggests that in order to fully test the potential benefits of integration; further research must be done to measure a number of institutional and individual indicators. The authors recommend that studies be undertaken to measure the impact of integration on:
- Recruitment and retention of participants;
- Participant transaction costs;
- Targeting of lower-income populations;
- Performance of microenterprise loans.